Thursday , 29 June 2017

What Will the Outcome of All the QE Mean for the U.S. (and the World)?

At the risk of looking/sounding like some crazed religious fanatic usually seen carrying a sign or proclaiming: “Repent, the end is near,” I shall avoid the word “repent”. To me, the rest of that proclamation appears accurate and reasonable, at least with regard to our economic condition. [Let me explain:] Words: 1896

So says Monty Pelerin ( in edited excerpts from his original article*.

Lorimer Wilson, editor of and  has edited the article below for length and clarity – see Editor’s Note at the bottom of the page. This paragraph must be included in any article re-posting to avoid copyright infringement.

Pelerin goes on to say, in part:

The U.S. and world economy are near collapse. Sovereign debt, driven by increasingly desperate government interventions, spirals upward at accelerating rates. There is no recovery and there can be no recovery with the debt levels of both governments and citizens.

The Myth of Keynesianism

For a time fiscal and monetary stimulus were undertaken in the hopes that they would enable economies to achieve traction and return to normal growth paths. The political myth of Keynesianism demanded such “conventional” tools be applied. Almost five years into the economic crisis, there has been no recovery, despite trillions of dollars wasted and there can not be one without massive debt liquidation and the redeployment of misplaced capital.

Lip service is still given to the pseudo economics known as Keynesianism. Die-hards like Paul Krugman and other Statists continue to insist it is the answer to a recovery and push for additional interventions. Statists defend this alchemy because it is the source of government growth and power. In applying more of these remedies, the ultimate resolution of the crisis is [not only] deferred but made worse.

Why Do Interventions Continue?

Interventions, primarily in the form of monetary expansion, continue. Many in the political class realize additional stimulus cannot solve the economic problems. The reason for favoring them is not for an economic cure but as a means to continue government spending at its unsustainable levels. Keynesian economics has always been a political rather than economic tool. The pretense otherwise is becoming harder to maintain.

Lance Roberts, commenting on the latest Richmond Fed data, states:

The injections of liquidity into the system were able to drag forward future consumption, a consequence of which we will have to deal with later, in order to keep economic growth in positive territory.

This chart was part of the rationale for Mr. Roberts’ position:

The impact of no QE3, as described by Mr. Roberts, was devastating in July:

Shipments came to a screeching halt declining from 0 to -23 in July while Inventories rose from 9 to 21. Rising Finished Goods Inventories sitting on the shelves is not an economic positive as the build is likely unwanted given the weakness in New Orders. The weakness in orders also leads to decreasing rates of Capacity Utilization which slipped from -4 in June to -16 in July.

What If Monetary Easing Is Not Re-instituted?

Stopping monetary infusions means a downturn in the economy. The Fed will likely announce new stimulus, especially given the political election. The quaint notion of Fed independence and its unwillingness to take policy actions at this stage in an election cycle will be tested and found wanting. The Fed is a creation of Congress and a political animal, just as any other governmental agency. Incumbents, overwhelmingly want the appearance of a good economy in order to enhance their re-election prospects.

Daniel Amerman described the motivations for printing more money:

1. Creating money out of thin air on a massive basis is all that stands between the current state of hidden depression, and overt depression with unemployment levels in excess of those seen in the US Great Depression of the 1930s.

2. It is the weapon of choice being used to wage currency war and reboot US economic growth.

3. It is the most effective way to meet not just current crushing debt levels, but to deal with the rapidly approaching massive generational crisis of paying for Boomer retirement promises.

4. Political survival and enhanced power for incumbent politicians.

Not reinstating some form of quantitative easing (printing money) would quickly reveal the bankruptcy of the federal government. Last year the Fed purchased 61% of treasuries issued. The Fed now has surpassed China (who is attempting to divest) as the largest holder of US debt. Federal funding needs are no less this year and in the future. Without printing, government cannot pay its bills. Tax collections and private capital markets are insufficient to meet the level of spending.

Maturing debt can be retired only with the issuance of new debt. Government spending continues upward, never downward. The political elite of all countries behave as carnival barkers, promising benefits that cannot be delivered and plundering the productive in an effort to continue their failing scam.

As Gerald Celente expressed it (my emboldening):

The entire financial system is under collapse. It’s not about the Greeks; it’s not about the Spanish; it’s not about the Italians; it’s not about the English; it’s not about the Americans; it’s not about the Chinese; it’s about everybody.

Capital pools, the normal source of funding, are not large enough to fund governments’ debt. Sovereigns survive only via the charade of lending to themselves via central bank money creation. The mechanics are made deliberately obscure, but that is all that keeps governments afloat. Central banks, questionable institutions to begin with, are now nothing but counterfeiting operations for governments out of control. Capitalism has devolved into something little different from the central planning that was practiced under the Soviet Union.

As Judy Shelton pointed out:

The problem for the Soviet government was that financing provided by the state-controlled bank was supporting an increasingly unproductive economy—bailing out unprofitable enterprises that had long since quit producing real economic gains that might have raised living standards. The extension of credit to these entities had little to do with merit or potential usefulness.

That description now fits what were once capitalist economies. For these societies the ending will be similar to that of the Soviet Union. Ms. Shelton also commented on the real need for a central bank, as seen by Lenin:

Lenin had been wise about the uses of banks. Shortly before the October Revolution, he wrote: “Without big banks, socialism would be impossible. The big banks are the ‘state apparatus’ which we need to bring about socialism, and which we take ready-made from capitalism.”

The Relationship Between Growth and Debt

As debt increases as a percentage of GDP, economic growth slows. The theoretical basis for this belief is obvious. Debt reflects advanced consumption which means less future consumption in order to retire the debt. Interest payments only exacerbate matters. Both government and private economists tend to ignore this relationship, forecasting future rates of growth independently of the debt burden.

A study by Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff provide empirical support to the drag imposed by debt. Their study showed that when public debt was less than 90% of GDP for at least 5 years growth averaged 3.5% but it went down to only 2.3% per year when public debt was more than 90% of GDP. This is a reduction of 1.2%, or a little more than a third of annual economic growth.

The temporary boost in economic activity in the short term produced by increased debt is a nice by-product, but one that is costly in the long term. Soon, monetary expansion or debt will no longer to provide this temporary diversion. For all practical purposes, the U.S. and Europe have reached this saturation point.

Economies which benefited from the excessive consumption of the past, now stagger under the burden of having lived beyond their means. The siren song of John Maynard Keynes’ short run has played out and we have reached the long run where “we are all dead.”

The fallacy of national income accounting must be noted. It measures spending rather than net worth. Hence profligate nations can look good while they consume the capital provided by earlier generations. High consumption can be achieved by dis-saving and borrowing. Just as your seeming wealthy neighbor with the big house and new cars appeared to be doing well, so can an economy but when your neighbor loses his home and assets because he was in debt beyond his capabilities, his life style looks less attractive. GDP looks good the more people spend, but ultimately the strength of an economy, just like an individual, is measured in net worth. Consuming capital to appear prosperous is a means to ruin.

The time to cure the debt problems via economic nostrums has passed. Our current situation is better understood by simple arithmetic rather than esoteric economic theories.

As Mitch Daniels observed:

Whether one believes in a large, very active government or something more limited, mathematically, the amount of debt we already have and the terrifying rate at which it is accumulating will lead to national ruin

Keynes is gone, but his bromides now threaten the very survival of Western civilization.

Some Hard Data

Most citizens have no idea what their government is doing to them. Recipients (dependents) of government largess understand what they are getting but have little understanding where it comes from. To them, they are entitled to be supported by government. Few understand that government has no “stash,” produces nothing and gains only from plundering the productive. Robbing Peter to pay Paul may buy votes, but it is not an economically viable strategy.

The Ponzi scheme of government has been going on for the last six or seven decades. Like all such schemes, it eventually exceeds its ability to continue. Every country in the world that has adopted the social welfare state model (a polite description of various stages of Socialism) is insolvent and hopelessly indebted to degrees from which they cannot recover.

Desperation on the part of the governing elite is apparent and has been for a decade or so. The death spiral of these democracies is well underway.

  • Collapse could occur any time or it could stretch out for some time as a period of stagnation and declining living standards. Japan has managed to extend their misery for about thirty years.
  • The U.S., hardly the worst of the lot, is doomed nevertheless because of its profligate government spending and promises. It may not be the first to go belly-up, but neither will it be the last.

To understand how serious its situation is, consider this observation from Ty Andros:

In the United States the government spends more than $31,000 dollar per household per year. ABSURD. Every citizen OWES $440,000 towards the national debt and UNFUNDED entitlements. In order to meet their obligations they plan to attempt to take everything the private sector HAS.

Let this sink in:

A family of four’s share of federal government debt and promises is $1,760,000. This number does not include the debt and unfunded liabilities of state and municipal governments nor does it include the personal debt of the family — mortgages, car loans, credit cards, etc.

There is neither an economic solution to this problem nor is there any other solution. The laws of arithmetic preclude one. Modern economies have reached the point where they have only two options as correctly described by Ludwig von Mises:

There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should:

  1. come sooner as the result of a voluntary abandonment of further credit (debt) expansion,
  2. or later as a final and total catastrophe of the currency system involved.


It is just that simple. No political rhetoric or economic policies can alter the outcome.

Editor’s Note: The above posts may have been edited ([ ]), abridged (…), and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.


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